03/31/2010 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB255 | |
| HB162 | |
| Overview by Dnr and Dor on Cook Inlet Incentives | |
| SB309 | |
| SB290 | |
| HB280 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| *+ | SB 309 | TELECONFERENCED | |
| *+ | SB 290 | TELECONFERENCED | |
| + | HB 280 | TELECONFERENCED | |
| = | SB 255 | ||
| = | HB 162 | ||
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
March 31, 2010
3:32 p.m.
MEMBERS PRESENT
Senator Bill Wielechowski, Co-Chair
Senator Charlie Huggins, Vice Chair
Senator Hollis French
Senator Bert Stedman
Senator Gary Stevens
Senator Thomas Wagoner
MEMBERS ABSENT
Senator Lesil McGuire, Co-Chair
COMMITTEE CALENDAR
SENATE BILL NO. 255
"An Act relating to sharing records regarding fish purchased by
fish processors with certain federal agencies, to requirements
to obtain and maintain a fisheries business license, and to
payment of industry fees required of fish processors; and
providing for an effective date."
- MOVED SB 255 OUT OF COMMITTEE
HOUSE BILL NO. 162
"An Act establishing the Southeast State Forest and relating to
the Southeast State Forest; and providing for an effective
date."
- MOVED SCS HB 162(RES) OUT OF COMMITTEE
OVERVIEW BY DNR AND DOR ON COOK INLET INCENTIVES
- HEARD
SENATE BILL NO. 309
"An Act amending and extending the exploration and development
incentive tax credit under the Alaska Net Income Tax Act for
operators and working interest owners directly engaged in the
exploration for and development of gas from a lease or property
in the state; providing for an effective date by amending the
effective date for sec. 2, ch. 61, SLA 2003; and providing for
an effective date."
- HEARD AND HELD
SENATE BILL NO. 290
"An Act providing a credit against the tax on the production of
oil and gas for drilling certain exploration wells in the Cook
Inlet sedimentary basin."
- HEARD AND HELD
COMMITTEE SUBSTITUTE FOR HOUSE BILL NO. 280(FIN) AM
"An Act relating to a gas storage facility; relating to the
Regulatory Commission of Alaska; relating to the participation
by the attorney general in a matter involving the approval of a
rate or a gas supply contract; relating to an income tax credit
for a gas storage facility; relating to oil and gas production
tax credits; relating to the powers and duties of the Alaska Oil
and Gas Conservation Commission; relating to production tax
credits for certain losses and expenditures, including
exploration expenditures; relating to the powers and duties of
the director of the division of lands and to lease fees for a
gas storage facility on state land; and providing for an
effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: SB 255
SHORT TITLE: FISH PROCESSOR FEES, LICENSES, RECORDS
SPONSOR(s): SENATOR(s) OLSON
02/03/10 (S) READ THE FIRST TIME - REFERRALS
02/03/10 (S) RES, FIN
03/29/10 (S) RES AT 3:30 PM BUTROVICH 205
03/29/10 (S) Heard & Held
03/29/10 (S) MINUTE(RES)
BILL: HB 162
SHORT TITLE: SOUTHEAST STATE FOREST
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
03/02/09 (H) READ THE FIRST TIME - REFERRALS
03/02/09 (H) RES, FIN
04/08/09 (H) RES AT 1:00 PM BARNES 124
04/08/09 (H) Moved Out of Committee
04/08/09 (H) MINUTE(RES)
04/10/09 (H) RES RPT 7DP 1AM
04/10/09 (H) DP: OLSON, EDGMON, TUCK, SEATON,
WILSON, JOHNSON, NEUMAN
04/10/09 (H) AM: KAWASAKI
04/13/09 (H) FIN RPT 5DP 5NR
04/13/09 (H) DP: THOMAS, FOSTER, AUSTERMAN,
FAIRCLOUGH, JOULE
04/13/09 (H) NR: GARA, CRAWFORD, KELLY, SALMON,
STOLTZE
04/13/09 (H) FIN AT 8:30 AM HOUSE FINANCE 519
04/13/09 (H) Moved Out of Committee
04/13/09 (H) MINUTE(FIN)
04/15/09 (H) TRANSMITTED TO (S)
04/15/09 (H) VERSION: HB 162
04/16/09 (S) READ THE FIRST TIME - REFERRALS
04/16/09 (S) RES
01/20/10 (S) FIN REFERRAL ADDED AFTER RES
03/29/10 (S) RES AT 3:30 PM BUTROVICH 205
03/29/10 (S) Heard & Held
03/29/10 (S) MINUTE(RES)
BILL: SB 309
SHORT TITLE: GAS EXPLORATION\DEVELOPMENT TAX CREDIT
SPONSOR(s): RULES BY REQUEST
03/25/10 (S) READ THE FIRST TIME - REFERRALS
03/25/10 (S) RES, FIN
03/31/10 (S) RES AT 3:30 PM BUTROVICH 205
BILL: SB 290
SHORT TITLE: TAX CREDIT TO DRILL WELLS IN COOK INLET
SPONSOR(s): WAGONER
02/22/10 (S) READ THE FIRST TIME - REFERRALS
02/22/10 (S) RES, FIN
03/31/10 (S) RES AT 3:30 PM BUTROVICH 205
BILL: HB 280
SHORT TITLE: NATURAL GAS: STORAGE/ TAX CREDITS
SPONSOR(s): HAWKER, CHENAULT
01/15/10 (H) PREFILE RELEASED 1/15/10
01/19/10 (H) READ THE FIRST TIME - REFERRALS
01/19/10 (H) L&C, RES, FIN
02/08/10 (H) L&C AT 3:15 PM BARNES 124
02/08/10 (H) Heard & Held
02/08/10 (H) MINUTE(L&C)
02/15/10 (H) L&C AT 3:15 PM BARNES 124
02/15/10 (H) Moved CSHB 280(L&C) Out of Committee
02/15/10 (H) MINUTE(L&C)
02/17/10 (H) L&C RPT CS(L&C) NT 4DP 2NR 1AM
02/17/10 (H) DP: LYNN, NEUMAN, CHENAULT, OLSON
02/17/10 (H) NR: HOLMES, T.WILSON
02/17/10 (H) AM: BUCH
02/19/10 (H) RES AT 1:00 PM BARNES 124
02/19/10 (H) -- MEETING CANCELED --
02/26/10 (H) FIN AT 1:30 PM HOUSE FINANCE 519
02/26/10 (H) <Bill Hearing Canceled>
03/12/10 (H) RES AT 1:00 PM BARNES 124
03/12/10 (H) Heard & Held
03/12/10 (H) MINUTE(RES)
03/15/10 (H) RES AT 1:00 PM BARNES 124
03/15/10 (H) Moved CSHB 280(RES) Out of Committee
03/15/10 (H) MINUTE(RES)
03/17/10 (H) RES RPT CS(RES) NT 5DP
03/17/10 (H) DP: EDGMON, OLSON, P.WILSON, SEATON,
JOHNSON
03/17/10 (H) FIN AT 9:00 AM HOUSE FINANCE 519
03/17/10 (H) <Bill Hearing Postponed to 1:30 pm
Today>
03/17/10 (H) FIN AT 1:30 PM HOUSE FINANCE 519
03/17/10 (H) Heard & Held
03/17/10 (H) MINUTE(FIN)
03/18/10 (H) FIN AT 9:00 AM HOUSE FINANCE 519
03/18/10 (H) Heard & Held
03/18/10 (H) MINUTE(FIN)
03/18/10 (H) FIN AT 1:30 PM HOUSE FINANCE 519
03/18/10 (H) Moved CSHB 280(FIN) Out of Committee
03/18/10 (H) MINUTE(FIN)
03/22/10 (H) FIN RPT CS(FIN) NT 9DP 1AM
03/22/10 (H) DP: AUSTERMAN, FAIRCLOUGH, KELLY,
N.FOSTER, DOOGAN, THOMAS, JOULE,
STOLTZE
03/22/10 (H) HAWKER
03/22/10 (H) AM: GARA
03/24/10 (H) TRANSMITTED TO (S)
03/24/10 (H) VERSION: CSHB 280(FIN) AM
03/25/10 (S) READ THE FIRST TIME - REFERRALS
03/25/10 (S) RES, FIN
03/31/10 (S) RES AT 3:30 PM BUTROVICH 205
WITNESS REGISTER
SENATOR OLSON
Alaska State Legislature
Juneau, AK
POSITION STATEMENT: Sponsor of SB 255.
CHRIS MAISCH, State Forester
Department of Natural Resources (DNR)
Juneau, AK
POSITION STATEMENT: Supported HB 162.
KEVIN BANKS, Director
Division of Oil and Gas
Department of Natural Resources (DNR)
Juneau, AK
POSITION STATEMENT: Presented overview of Cook Inlet oil and gas
incentives from DNR perspective, and commented on SB 309 and SB
290.
MARCIA DAVIS, Deputy Commissioner
Department of Revenue (DOR)
Juneau, AK
POSITION STATEMENT: Presented overview of Cook Inlet oil and gas
incentives from DOR perspective, and commented on SB 309 and SB
290.
MIKE PAWLOWSKI
Aide to Senator McGuire
Alaska State Legislature
Juneau, AK
POSITION STATEMENT: Commented on SB 309 for the sponsor.
KAREY LOCKHART, Production Manager
Alaska Operations
Marathon Oil Corporation
POSITION STATEMENT: Supported SB 309.
MARK LAND, Executive Vice President, Land and Administration
Renaissance Alaska, LLC, &
Vice President, Land and Business Development
Buccaneer Energy Limited Alaska
POSITION STATEMENT: Commented on SB 309.
STACY SHUBERT, Director
Intergovernmental Affairs
Mayor Sullivan's Office
Anchorage, AK
POSITION STATEMENT: Supported SB 309 at the request of Mayor
Sullivan.
MARY JACKSON
Staff to Senator Wagoner
Alaska State Legislature
Juneau, AK
POSITION STATEMENT: Commented on SB 290 for the sponsor.
REPRESENTATIVE MIKE HAWKER
Alaska State Legislature
Juneau, AK
POSITION STATEMENT: Sponsor of HB 280.
ACTION NARRATIVE
3:32:30 PM
CO-CHAIR WIELECHOWSKI called the Senate Resources Standing
Committee meeting to order at 3:32 p.m. Present at the call to
order were Senators Wagoner, French, Huggins, Stevens, and
Wielechowski.
SB 255-FISH PROCESSOR FEES, LICENSES, RECORDS
3:33:47 PM
CO-CHAIR WIELECHOWSKI announced SB 255 to be up for
consideration. He said this bill would enable fisheries that
have elected to pursue and permit buyback program to do so. The
purpose is to stabilize the fleet and ensure the long term
economic stability of the fishery. This bill creates the legal
mechanisms to ensure the proper accounting of all the
transactions involved in this process.
3:34:12 PM
SENATOR OLSON, sponsor of SB 255, said this bill strengthens the
viability of the fisheries even though it is fairly simple.
CO-CHAIR WIELECHOWSKI noted a letter of intent that would
accompany the bill with six signatures. He explained that it is
the result of an agreement between the seiners and the
processors that the permit buyback program will not remove more
permits than necessary for the health and viability of the
fishery and sets the number of permits at 260.
SENATOR FRENCH moved to report SB 255 from committee with
individual recommendations, attached fiscal note(s), and letter
of intent. There were no objections and it was so ordered.
HB 162-SOUTHEAST STATE FOREST
3:36:16 PM
CO-CHAIR WIELECHOWSKI announced HB 162 to be up for
consideration. It would establish a new Southeast State Forest
on about 25,000 acres of state lands presently used for timber
harvest. The establishment of a forest will enable the Division
of Forestry to manage these lands for a long term supply of
timber for local processors. Lands in the forest would also
continue to be open for multiple uses. He said they heard
resounding public support for this bill on Monday.
He said there were two small conceptual amendments to change the
date on page 6, line 9, from July 1, 2009 to July 1, 2010 and
the second would be to make the same change to line 11. He said
the change was previously made, but to the wrong version of the
bill.
3:37:37 PM
CHRIS MAISCH, State Forester, Department of Natural Resources
(DNR) agreed that those two changes needed to be made.
SENATOR HUGGINS remembered the when they did the University
lands bill and suddenly a lot of communities came out and said
they had never heard of it before. Would they hear from
communities that they were surprise by this or have concerns
that they weren't able to voice.
MR. MAISCH replied no; they spent a lot of time in Southeast
Alaska and this bill had wide support.
CO-CHAIR WIELECHOWSKI moved conceptual Amendment 1. There were
no objections and it was adopted.
SENATOR STEDMAN joined the committee.
3:39:31 PM
SENATOR FRENCH moved to report HB 162 as amended from committee
with individual recommendations and attached fiscal note(s).
There being no objection, SCS HB 162(RES) moved from the Senate
Resources Standing Committee.
^Overview by DNR and DOR on Cook Inlet incentives
3:41:22 PM
CO-CHAIR WIELECHOWSKI announced the overview of Cook Inlet
incentives by the Department of Natural Resources (DNR) and
Department of Revenue (DOR).
3:41:30 PM
KEVIN BANKS, Director, Division of Oil and Gas, Department of
Natural Resources (DNR), introduced himself. He said he would
speak to incentives particularly related to royalties (managed
by the DNR) and Marcia Davis would speak about tax credits. He
said AS 38.05.180(j) provides three kinds of opportunities for
lessees to reduce their royalties under certain circumstances.
This statute was passed in 1995 with a lot of controversy, but
several things are very important and valuable.
Basically, Mr. Banks explained, if you have an existing field
that is nearing the field's end, it is possible under AS
38.05.180(j) to reduce the royalty to 3 percent - if it can be
established that the life of the field can be extended by doing
so. He explained they view "end of field life" as being at the
point where the revenues coming for sale of the oil and gas off
of the lease exceed the operating costs. It will happen to every
field and if they can reduce the royalty at that point, there is
a chance that the life of the lease could be extended by as much
as 18 to 24 months.
It also provides for a reduction in royalty should a field shut
down for a period of time. A situation like that was at Milne
Point in the mid-80s when the prices collapsed. Conoco (not the
ConocoPhillips of today) at the time was one of the four oil
companies on the North Slope and had to bring the field to shut
in; then they subsequently restarted it and applied for royalty
relief. Under the circumstances that followed the royalty wasn't
granted but that was the situation. More importantly, in 1995 AS
38.05.180(j) was changed to offer royalty relief before
production begins. This is unique in that now we are saying that
if there can be a showing that a royalty relief under these
terms can affect the economics of a project so that it moves it
into the success pile instead of the failure pile, you can move
forward with it and get a royalty relief down to 5 percent. The
lessee has to meet some requirements in order for him to permit
it, however, because they are talking about a prospective
situation.
The lessee has to provide the department with sufficient
information about the reservoir, the resource itself and the
kinds of costs it expects. The department evaluates it against a
price forecast and some measure of risk and uncertainty for
developing the field. A certain amount of delineation of the
prospect has to be done, and that involves a fairly thorough
look on the part of the department to determine that the state's
best interests are served. He said he looks for royalty relief
credit to be both effective and efficient. It should be
effective in so far as it will alter the behavior of the lessee
so that their economics have improved so much that they will
move ahead and develop. And it's efficient in so far as it
grants no more royalty relief than is needed to achieve the
change in behavior.
MR. BANKS said the statute also says that this relief must be
tied to some kind of price or some other measure of economic
success so that if prices rise, the department can condition the
royalty relief on the improved economics that higher prices
might cause.
3:48:19 PM
MR. BANKS stepped down to the discovery royalty and said for
many of the leases on state land, which are probably all in
production or have long since expired, it is possible to get
discovery royalty of 5 percent for the first 10 years of
production (for pre-1969 leases). A few of those may still have
that opportunity. Cook Inlet also has a discovery royalty
provision for the first 10 years of production. Finally, in
1998/99, a law passed that identified six pools that had been
discovered earlier, which if someone could bring them into
production, the first 25 million barrels of oil or the first 35
bcf gas are subject to a 5 percent royalty for the first 10
years of production by 2004. The fields that were subject to
that were Nicolai Creek, Redoubt Shoals, West Foreland, North
Fork, and Sterchikof, which were not in production at that
point. Right now Nicolai Creek is in production, North Fork is
under development right now by Armstrong, and Redoubt Shoals is
one of the properties that was involved in the bankruptcy of
Pacific Energies and is now owned by Cook Inlet Energy.
MR. BANKS said the department also has a managing and
exploration licensing program, although that is not a normal
incentive. After tomorrow they will offer a period in which
applicants for exploration licensing can come to the DNR with
suggestions to acquire land in areas outside of the Cook Inlet
and North Slope with nothing more than the size of a work
commitment and acquire limited rights to exploration, which upon
completion of some work commitments that may be offered by the
applicant that license converts to a conventional oil and gas
lease. It is an incentive in one regard in that competitive
bidding is not necessarily involved (unless there are challenges
for the same piece of property). But no bonus bidding is
involved, so the cash that would normally go to the state in the
form of a bonus bid goes into the ground in the form of some
exploration program.
3:51:49 PM
MARCIA DAVIS, Deputy Commissioner, Department of Revenue (DOR),
explained that the exploration tax credit is 40-50 percent of
drilling costs. Drilling costs under the Alaska's statutes are a
collection of both operating and capital costs.
CO-CHAIR WIELECHOWSKI asked if the exploration incentive credit
(EIC) and exploration tax credit (ETC) credits are cumulative.
MS. DAVIS answered that each credit has a description of when it
can be used and she would have to look at that. She thought the
EIC is exclusive. The EIC also covers seismic, but only costs
that are outside of an existing unit. Likewise for the
exploration drilling costs - all of those are parted; either
you're outside of 25 miles in which case you get 40 percent; if
you're three miles outside a unit or three miles away from a
well and less than 25 miles away from existing units then you
get the 30 percent credit. None of these credits are available
if the drilling is happening within existing unit boundaries.
3:53:41 PM
SENATOR FRENCH said in his chart under "North Slope" it says "30
percent of drill costs if greater than 25 miles and preapproved"
and asked if "preapproved" is the qualifier.
MS. DAVIS answered "exactly." You have to meet one and two in
order to get the 40 percent.
SENATOR FRENCH asked what the situation is between three miles
and 25.
MS. DAVIS answered you're still at 30 percent because you're
greater than three miles; if it's less than three, you get
nothing. She explained that there are several types of
production tax credits; the first one is the qualified capital
expenses credit (AS 43.55.023) - essentially 20 percent of
things that are known as qualified capital expenditures, defined
in that section as essentially the intangible drilling costs.
The trick about the qualified capital expenditure credit is that
you can use half in the current year and half in the following
year.
3:55:33 PM
She explained that the loss carry forward credit (AS 43.55.023)
is essentially if a producer has capital expenditures and can't
fully deduct them (in other words, you have earned less than you
expended that year), they are allowed to use 25 percent and use
that in the following year as a net operating loss credit.
SENATOR FRENCH asked what happens to the other 75 percent.
MS. DAVIS answered it goes away.
SENATOR FRENCH asked that they are transferable in the sense
that you can push them forward, but you can't sell them.
MS. DAVIS answered yes. Your net operating loss is essentially
that you take 25 percent of the capital expenses that you had.
If that equates to the full loss that you had, that's what
you've got. But you can't claim a loss for more than what was 25
percent of your capital expenditures in that year.
3:56:47 PM
MS. DAVIS said the third credit is known as the "small producer
credit" or "frontier basing credit." She said people sometimes
miss two of the credits in one section. The first one in AS
43.55.025(a) is a $6 million credit that is given to someone who
produces less than 50,000 barrels per year from non-North
Slope/non-Cook Inlet properties. The second small producer
credit is up to $12 million for a producer that has less than
100,000 barrels average per day. So a producer that has 50,000
barrels or less per year will get the full $12 million; between
50,000 and 100,000 it gets proportionately drawn down.
Finally, the other benefit under the production tax is the
economic limit factor (ELF), the reduced tax for Cook Inlet-
related properties. The net effect of that is that the maximum
tax on gas coming out of the Cook Inlet region is 17 cents/mcf
(by formula) and the maximum tax on oil per barrel is zero
dollars.
3:58:29 PM
SENATOR FRENCH asked if any of the credits can be combined.
MS. DAVIS answered that the same expenditure can either be used
either as an exploration tax credit or as a qualified capital
expenditure credit; it can't be both.
SENATOR FRENCH asked which can be sold either to the state or to
another producer.
MS. DAVIS replied the exploration tax credit, the capital credit
under AS 43.55.023(a)(b) and AS 43.55.025 and the net operating
loss can be cashed out, but not the small producer credits.
SENATOR FRENCH asked if those are the only ones that are
transferable or sellable on the market.
MS. DAVIS added that those are only cashable by taxpayers who
have an average of 50,000 barrels or less of production per day.
CO-CHAIR WIELECHOWSKI said he wanted to understand the
difference between the EIC and ETC better.
MR. BANKS interrupted to explain that an EIC is a DNR-offered
credit that becomes a term of the lease before the lease sale.
Generally speaking it's some proportion of the well cost - some
amount of money per foot or some percentage of the total cost up
to 50 percent. It makes the lease more attractive.
CO-CHAIR WIELECHOWSKI asked if the first "default" would be the
ETC which anyone would be eligible for and if the state wanted
to incentivize a lease more it could be raised from 30 percent
to 50 percent.
MR. BANKS replied that he wasn't sure that the EIC under AS
38.05 is additive to the ETC.
MS. DAVIS said she did not see any exclusions in AS 43.55.025,
which means that it is additive.
4:02:05 PM
CO-CHAIR WIELECHOWSKI asked if someone could get an 80 percent
tax credit.
MR. BANKS answered if he offered leases with that 50 percent
credit, yes.
CO-CHAIR WIELECHOWSKI asked Mr. Banks if the royalty
modification is similar to the EIC in that it is something he
would offer to potential lessees or would a producer ask him for
royalty relief for a marginal field.
MR. BANKS answered that it works in the later case. It is not a
provision of the lease; it is a provision in AS 38.05.180(j)
that allows a lessee to ask for royalty relief prospectively.
CO-CHAIR WIELECHOWSKI asked how many leases in Cook Inlet have
royalty modifications.
MR. BANKS answered there are none in Cook Inlet; the only two
places that have a form of royalty modification (AS
38.05.180(j)) are the leases in Oooguruk on the North Slope and
in the Nikiachuk Unit, and he explained that Nikiachuk was
evaluated after the PPT had passed; so they accounted for the
economic effects of that in their evaluation.
SENATOR FRENCH said the basic argument they would be confronted
with from a producer is the that the economics of a field are
challenged for whatever reason, and he asked if there was any
limit on the reasons they can present - like being too far from
existing infrastructure, having a difficult formation to
produce, or heavy oil.
MR. BANKS replied that it all gets boiled down to how much it
costs to develop the field. Distance would matter if
infrastructure was needed. Most of those issues would be
captured in the cost of development.
SENATOR FRENCH asked if anything prevents a producer from making
the argument that taxes on a field are so high that the royalty
needs to be lowered so the field could stay in production.
MR. BANKS answered no; that is a plausible argument and it would
be incorporated in his evaluation, as would how the
progressivity would work. In the evaluations the department has
done so far, however, moving the royalty rate from the average
of 12.5 percent down to 5 percent often doesn't make a very big
difference in the economics of a project, because the royalties
are paid basically after production begins and after a great
deal of the money has been spent.
SENATOR FRENCH recapped that it's hard to make the argument that
a 7 percent reduction in royalty would make a big difference in
the economics of a field.
MR. BANKS said that is correct, and he reminded him that the
department evaluates these prospects before production begins
and before a major investment occurs. His point is if you are
offering royalty relief it will typically occur after all the
big money has been spent.
SENATOR FRENCH asked if a royalty reduction can be brought on
with any lease the state oversees.
MR. BANKS responded that the prospective reduction is only
provided to those fields that are not in production.
CO-CHAIR WIELECHOWSKI asked what factors he looks at to
determine a royalty reduction.
MR. BANKS answered they try to place the economics of the
project into what a prudent operator would do to move a project
forward - perhaps the net present value of a project at some
discount rate, the internal rate of return, capital efficiency,
and some risk measurement. They would consider what would happen
if the project would become wildly successful.
4:09:23 PM
MS. DAVIS interrupted to clarify an earlier answer she gave when
asked if this is the only tax incentive. It is the only
incentive for production tax, but another tax provision should
be on the chart - the corporation income tax credit known as the
gas exploration and development tax credit under AS 43.20.043.
That provision provides for gas exploration expenditures that
are non-North Slope gas; under current law, 10 percent of those
expenditures become a credit against the corporate income tax.
If you use that credit it is in lieu of the EIC or any of the
production tax credits, although some of the language is
problematic.
She also wanted to go back and answer the question about which
credits are in lieu of other credits. The only provision under
the production tax regime (five potential benefits) that has to
be exclusive is the capital credit under AS 43.55.023(a). But if
a new player who is under that 50,000 barrel threshold could do
an exploration well that would qualify for the exploration tax
credit. If they don't have a lot of production, they will likely
have a lot of expenses and not much income; so they will
generate a net operating loss credit. They will also conceivably
qualify for the small producer credit ($12 million) and
depending on where they are located (not the North Slope or Cook
Inlet) they could also get the $6 million. If you are an
incumbent producer with over 100,000 barrels then you are
essentially looking at the capital credit or the exploration tax
as an alternative for the same expenditures if you have net
operating losses.
CO-CHAIR WIELECHOWSKI asked what they thought the legislature
needed to do to get existing companies to continue to explore
and to get new entrants to come in.
MR. BANKS answered that the AS 38.05.180(j) incentive takes a
very hard look at the kinds of economics that can be anticipated
for a particular project, but it is not automatic. Sometimes the
state just can't offer enough relief to make a difference. In
the last several weeks the concern has been raised by many that
relief isn't automatic. At least, a credit involves some kind of
assurance that the tax payer will be spending money in order to
get money, and the state is protected to a certain extent. But
of course they don't look at a lot of these credits with the
kind of eye that a AS 38.05.180(j) application would have to
have.
CO-CHAIR WIELECHOWSKI asked how Alaska's credits compare to
other countries and states - for Cook Inlet in particular.
MR. BANKS said he couldn't answer that, but no other state has
the kind of credits the Alaska DNR has. The federal government
offered royalty incentives for OCS in the Gulf of Mexico, but
that became quite controversial as prices rose.
SENATOR HUGGINS asked where the standard deduction would fit on
their chart.
MS. DAVIS answered that the standard deduction is a means of
calculating what the lease expenditures are and is part of the
tax calculation for arriving at what the production tax value
is. So they didn't add that as an incentive.
SENATOR HUGGINS asked what the net effect is of the standard
deduction.
MS. DAVIS answered that the effect is that you essentially take
the 2006 level of lease expenditures for the two large fields,
Prudhoe Bay and Kuparuk, and lock those in as the lease
expenditure level that would be allowed for three years - with
it being escalated by roughly 2 percent.
4:16:26 PM
SENATOR HUGGINS asked if the proximity piece of the exploration
tax credits for the North Slope had been about right or do they
require an adjustment.
MS. DAVIS answered in terms of the distance piece, their
experience is that wells were drilled, but the taxpayer has
chosen to use the credits that are available in some instance
under the capital expense credits because they can be
immediately cashable or returnable.
SENATOR HUGGINS asked what the most effective category for
exploration in 2010 is for new investment.
MS. DAVIS answered that the last full tax returns they looked at
were from 2008 and 91 percent of the credits that were applied
for and used against tax liabilities were the AS 43.55.023
credits, and approximately 6 percent were in the exploration tax
credit regime. The vast bulk of credits the state is issuing are
in the capital credits category. She clarified that her
statistics do not include companies that are currently incurring
costs that have no production. She would expect those companies
would be more heavily tilted toward the exploration credits.
4:18:49 PM
CO-CHAIR WIELECHOWSKI asked for their initial reactions to
President Obama's decision to expand drilling allowable areas in
Cook Inlet.
MR. BANKS said he was still trying to figure it out exactly what
it was that he did. It appears that there will be progress on
the existing leases in the Chukchi and Beaufort Seas. That is a
good thing, but he remains concerned that there may be some kind
of moratorium on future lease sales until studies are completed.
The opportunity to add to your prospect with some expected
timing as a lessee begins to explore its own existing prospects
is fairly important, and it's unfortunate that there may
actually be a delay.
CO-CHAIR WIELECHOWSKI asked them to let the committee know when
he has performed some initial analysis.
MR. BANKS pointed out that a line drawn from Anchor Point across
the Cook Inlet is about where the OCS begins heading south. So
there could very well be an impact starting there.
CO-CHAIR WIELECHOWSKI thanked them for their comments.
SB 309-GAS EXPLORATION\DEVELOPMENT TAX CREDIT
4:20:46 PM
CO-CHAIR WIELECHOWSKI announced SB 309 to be up for
consideration.
4:20:53 PM
MIKE PAWLOWSKI, Staff to Senator McGuire, clarified that the
legislation was offered at the request of the Senate Energy
Committee and Senator McGuire. He started off on the incentive
sheet they were just working off of. SB 309 deals with the area
under the exploration tax credit in AS 43.20.043, which is a tax
credit that specific to below the 68th parallel. It cannot be
taken in conjunction with other credits or royalty
modifications. So, it's specific to exploration within the Cook
Inlet or south of the 68th parallel and is not stackable with
the other credits.
He explained that SB 309 makes substantive changes to the
existing credit on page 3, line 25, that gets towards the NDR
Cook Inlet study and the recent Petro Technical Resources
assessment that the utilities prepared. He explained that one of
the principles underlying SB 309 is that the best place to look
for gas is probably within a gas field. In that the old
exploration incentive tax credit had to be on land that had not
been under production or had not been explored for, this
actually frees it up so that wells that are drilled within an
existing field can qualify for this incentive as well. The
incentive is further modified on page 2, lines 6-18, where new
language was added that increases the credit from 10 percent to
25 percent. This credit is against corporate income tax and is
not against production taxes.
MR. PAWLOWSKI said the third substantive change is on page 3,
lines 10-20. He explained that originally this credit was only
applicable against 50 percent of taxpayer's corporate income tax
obligation and SB 309 removes that 50 percent cap and allows the
credit to be claimed against the total tax liability.
Finally, he said, Sections 7 and 8 extend the sunset. This
particular exploration incentive tax credit is set to expire in
2013 and the bill extends it to 2020 with a transitional sunset
to 2024 for any carry-forward credit against a future tax
obligation.
4:24:40 PM
SENATOR HUGGINS asked what makes him think these incentives will
have an effect.
MR. PAWLOWSKI answered that the issue in Cook Inlet is related
to the production tax, which isn't very big. On the other hand,
corporations that are operating in Cook Inlet might have
substantial corporate income tax; so designing this tax credit
to apply against that tax exclusively provides a tool that might
work for a corporation that might not want to use one of the
other credits. Further, allowing development of an existing
field rather than looking outside of the existing fields really
is what gets to the heart of the bill because that is where gas
is likely to be found in the near term.
CO-CHAIR WIELECHOWSKI asked why he needs six lines on page 2,
lines 13-18 rather than just changing the 10 to a 25.
MR. PAWLOWSKI answered that the language has to be mirrored from
lines 4-9 in transitioning from the original 10 percent credit
to 25 percent credit.
CO-CHAIR WIELECHOWSKI asked what Section 2 does.
MS. DAVIS, Deputy Commissioner, Department of Revenue (DOR),
explained that Section 2 is simply trying to accommodate the
split in the two different tax years, pre-2010 and post-2010
era. One of the things that is sort of hidden is you've got the
split of the credit being for capital investment - taxpayer's
qualified capital investment and qualified services, both of
which are defined at the back of this tax section.
4:29:37 PM
CO-CHAIR WIELECHOWSKI asked why "reserves" is changed to "wells"
on line 29.
MS. DAVIS answered that this happened before she became
associated with the bill, but one of the attempts was made that
relates to an effort to change the credit from one that is
success oriented to one that gave a credit for the action of
drilling the well and doing the exploration regardless of
whether they ended up with a successful commercial producing gas
well. They are moving away from reserves to simply the well
being drilled.
MR. PAWLOWSKI said his understanding is that clerically reserves
are produced, but it is a well that actually produces gas. The
language was trying to get towards that concept, as well as get
away from the success concept.
MS. DAVIS said she understood that Legislative Legal was trying
to remove "per" from wherever they see it. That was the line 7
change and then line 8 removes the 50 percent cap of the income
tax liability. So, now this credit can draw down the income tax
liability entirely.
CO-CHAIR WIELECHOWSKI asked if a producer produces in Cook Inlet
and also has exploration on the North Slope, is there is a way
of writing off these taxes on North Slope production.
MS. DAVIS answered yes; under the corporate income tax they do
not look at different parts of the state; it's all combined.
4:31:41 PM
MS. DAVIS said deleting the language in Section 4 simplifies the
concept that a taxpayer is not entitled to a credit for capital
expenditures or qualified services made for activities related
to gas on the North Slope. The original draft specifically
excluded gas from the North Slope going to Valdez, which seemed
to suggest that gas from the North Slope going to Canada was
okay. It became more problematic to fix it than to eliminate it.
CO-CHAIR WIELECHOWSKI asked if this whole bill only applies to
south of 68 degrees.
MS. DAVIS answered that is correct.
CO-CHAIR WIELECHOWSKI asked if that includes Gubik.
MR. BANKS answered that Gubik is significantly north of the 68th
parallel.
CO-CHAIR WIELECHOWSKI asked if any significant development or
exploration going on south of 68 degrees.
MR. BANKS answered that he knew of proposals for exploration
activities in the Yukon region.
MS. DAVIS went to section 5 that adds language that deals with a
failure leg. It adds "if the exploration and development
activity touch on gas reserves regardless of whether there has
been commercial production in the area" - in other words they
can go back into a previously explored area - "or whether the
exploration and development activity results in the production
of a well, gas or well not capable of commercial production" -
meaning that they could end up having a mediocre well and it
could still be covered. Because of the use of the phrase "gas
reserve" throughout, from the administration's stand point, they
will probably have to lean heavily on DNR, because she is left
with the impression that if a rank wildcat-type gas exploration
well has no indication of gas reserves and they drill a dry
hole, the bill and the original statute is written such that
they are not accessing or touching gas reserves. So, in that one
instance this bill would not seem to apply.
4:35:43 PM
She said that section 5 also defines what is considered to be
the qualified capital investment. There is concern about
including "topping plant" in the list of properties breakdown
within (c). That was cleaned up because that is a crude oil
process for refining and it simply doesn't belong in a gas bill.
Concern was also expressed about processing units and whether
that included an LNG plant. Technically from an engineering
standpoint it would, and so the House cleaned that up by re-
referencing that as gas processing and gas treatment plants
(both downstream and upstream gas processing that would be
normal things), but excluding LNG or other manufacturing plants.
Another concern was about a power plant that powered
Southcentral being subsidized by the corporate income tax
credit. So, that was limited to power plants necessary for field
operation.
4:37:15 PM
MS. DAVIS said Section 6 clarifies when the timing of the credit
is being filed that was missing from the original section.
Sections 7 and 8 clean up the last dates the corporate income
tax credits can be used from 2017 to 2024 and from 2013 to 2020
(for the credit expiration).
She said one question was raised on HB 229 about whether this
credit could be used in lieu of the other credits. And she made
a misstatement there. When she read the current law, AS
43.20.043(g) it states "a taxpayer who obtains a credit under
this section may not claim a tax credit or royalty modification
provided under any other title." That begs the question that
since this is contained in AS 43.20, and since the production
tax is in AS 43.55, technically it is not in another title. She
didn't think the drafter intended to alter the assumption that
this is not an additive credit and so "this or any other title"
was inserted. And likewise for the benefit of the taxpayer, the
second line "however a taxpayer may at the taxpayer's election
forego a credit under this section in order to continue to
qualify for a credit provided for in another title" was
inserted.
4:39:44 PM
CO-CHAIR WIELECHOWSKI asked if the administration has a position
on the bill.
MS. DAVIS replied that she didn't know.
4:40:16 PM
KAREY LOCKHART, Production Manager, Alaska Operations, Marathon
Oil Corporation, said Marathon's operations are limited to Cook
Inlet and they have been operating there for over 55 years.
Marathon sells 87 mmcf/day to all of the current markets
available to them including the utilities, Tesoro, the
Department of Defense, and the LNG plant that is co-owned with
ConocoPhillips.
She explained that in 2003 several bills were passed directing
the state to provide incentives for new exploration and
development activities. Marathon was particularly interested in
HB 61, which was intended to incentivize exploration and
development of natural gas reserves in Cook Inlet. Regarding SB
309, she said, one might ask the need to provide incentives for
natural gas development in Cook Inlet and the answer is found by
considering the long-term decline in natural gas reserves and
deliverability which Cook Inlet has experienced. What must be
addressed is whether there is currently sufficient exploration
development activity to address such decline and reserves and
deliverability not just ask simply if Cook Inlet is running out
of gas. At the current level of activity, it is unlikely that
Cook Inlet reserve additions will replace annual production on a
long-term ongoing basis. This is the key.
Such natural gas reserves and deliverability are at risk for
continued decline resulting in exposure to unmet utility needs
which would impact everyone. The lack of activity is an artifact
of historic oversupply of natural gas. With prices well below
Lower 48 index prices create a lack of incentive for additional
drilling and further regulatory processes and deterioration in
market availability have added to project uncertainty. The
project economics and market uncertainties make it difficult for
projects to compete effectively for finite money.
4:42:38 PM
MS. LOCKHART asked what can be done to ensure the reliability,
and said the answer is not simple, and includes several things
that are being discussed today - storage, market access,
uncertainty and economic projects.
Alaska projects are not considered solely on their absolute
merits. They are compared on a relative scale in comparison to
other world-wide opportunities in which companies such as
Marathon may invest. SB 309 intends to level the playing field
of investment opportunities around the world. It is one part of
a three-part puzzle that needs to be fixed in order to ensure
natural gas reliability. She reiterated that in order to qualify
for this investment tax credit, the producer must make capital
investments adding to some level of value back to the state and
industry just to cross the value chain, which is necessary to
meet the overall deliverability needs of Southcentral.
4:44:06 PM
MARK LAND, Executive Vice President, Land and Administration,
Renaissance Alaska, LLC, and Vice President, Land and Business
Development, Buccaneer Energy Limited Alaska, said he had
prepared remarks specifically related to an amendment that he
heard was going to be added to SB 309 related to the repeal of
the future spend requirements under the existing tax credits.
CO-CHAIR WIELECHOWSKI said the amendment hadn't been introduced
yet, but he could still comment on it.
MR. LAND said Renaissance is headquartered in Houston, Texas,
and Buccaneer is a subsidiary of Buccaneer Energy Limited, a
publicly traded company in Australia with an operating office in
Houston. Renaissance was formed in November 2006 and completed
the initial funding of a business plan that solely focuses on
growth in Alaska, in particular Umiat Oil Field on the North
Slope. Buccaneer Alaska is a newly formed subsidiary of
Buccaneer Energy Limited and was just formed last week to solely
focus on growth in Alaska, particularly oil and gas
opportunities in Cook Inlet. They have over 80 years of
experience worldwide. The team members have identified, captured
funding, and developed oil and gas projects resulting in
cumulative recoverable reserves of over 1 billion barrels
equivalent. Since its formation, Renaissance has acquired BLM
and state oil and gas leases on 19,000 acres located on the
Umiat Oil Field, the National Petroleum Reserve and the Gubik
Gas Field on the North Slope. Buccaneer has entered into a
custom sale agreement with Stellar Oil and Gas to acquire 58,000
acres located in the Cook Inlet and Kenai Peninsula. Since 2006
Renaissance has spent in excess of $40 million completing
exploration evaluation operations in the state. A significant
amount of these funds were focused on evaluating the existing
oil field at Umiat with a modern 3-D seismic survey.
The tax credit under ACES is a significant reason why
Renaissance remains in Alaska, he said, and they believe the
availability of those credits will play a critical role in
attracting the required investment to develop the Umiat Oil
Field. The tax credits are also a significant reason for the
entry of Buccaneer into the Cook Inlet. To date, Renaissance has
applied for a total of $19.2 million in tax credits and has
received $1.3 million from the state of Alaska, $7.45 million
from the North Slope tax payers in the sale of the certificate,
and has approximately $7.6 million in certificates that they
have been unable to monetize.
MR. LAND repeated that Umiat is a known oil accumulation with
potential near-term development. It has real potential and is
one of the best opportunities to supply up to 50,000 barrels per
day to TAPS in the near term. Based on the work completed by
Renaissance and the state on the road to these resources, they
believe they are on a path to commercializing this gas.
He said it is common for these types of developments to have a
two-to-three lull in spending as they incur pre-engineering and
permitting of the project. In summary, they both support the
increased access, the capital credits for the new explorers, the
repeal of AS 43.55.028 (e)(2)(3) as set out in the amendment to
Section 8 of SB 309. They support the repeal that provides
greater certainty for new investors in Alaska, and levels the
playing field between new and existing operators in Alaska and
eliminates the unfair double standard that they believe exists
with the North Slope producers.
4:49:49 PM
STACY SHUBERT, Director, Intergovernmental Affairs, Mayor
Sullivan, Anchorage, said she was testifying in support of SB
309 at the request of Mayor Dan Sullivan. She said the
Municipality of Anchorage remains concerned about the declining
production of natural gas in the Cook Inlet specifically as it
relates to decreased deliverability through the gas system. One
of the first orders of business the Mayor acted on after taking
office was to create an Energy Task Force to address the serious
energy issues Railbelt consumers are faced with today. These
deliverability challenges will escalate in the next one to five
years, and if not addressed could result in rolling black outs
or worse. Both the Task Force and the Mayor applaud the
legislature's efforts to address these critical pieces of
legislation that address both incentives for storage and natural
gas exploration and production. The mayor also acknowledges the
work of the Railbelt utilities who have been working with the
administration on the Energy Watch Program, a green, yellow, red
system that informs customers to adjust their behavior in the
event of an impending energy crisis. "Conservation can be a
critical component that helps us to help ourselves in the event
of an immediate threatened energy crisis," she said.
In 2009 she said Anchorage almost experienced a catastrophic
event, and that is why the Mayor asked her to testify today in
support of the concepts proposed in SB 309 and HB 280, the Cook
Inlet Recovery Act that supports storage efforts. Gas storage is
the key to smoothing out the challenges posed by deliverability
peaks on cold winter days.
4:52:10 PM
CO-CHAIR WIELECHOWSKI closed public testimony and set SB 309
aside.
SB 290-TAX CREDIT TO DRILL WELLS IN COOK INLET
4:52:31 PM
CO-CHAIR WIELECHOWSKI announced SB 290 to be up for
consideration.
4:52:53 PM
MARY JACKSON, staff to Senator Wagoner, said the tax credit in
SB 290 is patterned after the Oklahoma land rush and it deals
exclusively with exploration. They call it the Cook Inlet
Stampede. It basically says that the first, second and third
explorer that comes gets a good benefit starting at 100 percent
and then going down to 75 percent and down to 50 percent. It is
offered under the alternative tax credit for oil and gas
exploration in Section 1.
Section 2 of the bill defines exactly what it is by defining the
first three explorers as those drilling into the sub-Cretaceous
zone. It allows for only one credit per explorer and if more
than one qualifies for one event, the department will determine
the percentage of the credit goes to each. A unique twist is if
the exploration results in production in paying quantities, the
credits are required to be repaid by 50 percent. Finally, if
explorers come in and actually start producing it strengthens
the Basin.
MS. JACKSON reviewed materials in the packet that include a
sponsor statement, a sectional analysis, a memorandum of
understanding from the Department of Revenue (November 2009)
that said there was a recent review by the department, a letter
of support from Escopeta Oil, a stratigraphic map that depicts
the zones and a recent DNR oil and gas activity map. A March 30
DOR fiscal note is indeterminate. She pointed out that this new
credit, if it's $20 million and they would have originally
gotten a 40 percent credit; it's a difference of 60 percent, not
the full $20 million.
She said language needed to be developed that clarifies this is
intended only for offshore exploration. State leases are
offshore in the Cook Inlet Basin; therefore, information
received from drilling of the well becomes public and DNR gets
to see it.
4:57:18 PM
The DNR recommended changing the sub-Cretaceous to the pre-
Tertiary period. The third point talks about the possible need
for three credits for jack-up rigs and permanent platforms that
are already there. A fourth is a question from DOR as to what is
considered transportation, although she is reasonably confident
that is addressed. The last issue was raised by the DOR which
was an oversight - a 25 percent net operating loss for capital
credits - and nowhere was it ever intended that anyone get 125
percent. So that needs to be clarified.
4:58:50 PM
CO-CHAIR WIELECHOWSKI read a statement from Escopeta Oil,
because he thought it was "pretty amazing." It predicts that the
Kitchen Lights Unit (KLU) contains approximately 440 million
barrels of recoverable oil and 5 tcf of natural gas. It goes on
to say that after platform and infrastructure implementation
there could be approximately 75,000 million barrels of oil and
300 mmcf of gas per day from the KLU anticlinal feature alone.
SENATOR WAGONER added that a portion of the reserves they are
talking about are from the Sunfish that ARCO discovered years
ago and didn't produce because the price went down to about $9
barrel.
5:00:03 PM
MS. DAVIS said after conferring with Kevin Banks, she believed
SB 290 would require DNR and DOR to work together to administer
this particular credit. First they want to make abundantly clear
that language on page 2, line 6, about the first to bore a hole
either implies that you have spudded the well (begun to drill)
or completed it. The joint recommendation would be to go with
the spud date for two reasons: one, it insures that good quality
field practices are being applied to the drilling well, and
second, the spud date is recorded by date and hour in the event
there is competition between two players. The DNR would have to
come up with some sort of certification or determination on
whether a well results in production in paying quantities.
5:02:41 PM
KEVIN BANKS, Director, Division of Oil and Gas, Department of
Natural Resources (DNR), explained that the notion here is that
you drill a well into a target that hasn't been discovered - a
sub-Cretaceous or pre-Tertiary zone. If production comes from
that zone, then part of the credit would be paid back. He said
that typically exploration wells are not converted in producers
for a number of reasons relating to location of the resource
when it comes time to produce after further field evaluations.
CO-CHAIR WIELECHOWSKI asked if he had any public data on
reserves in the sub-Cretaceous zone.
MR. BANKS answered that they don't know very much about what is
in the sub-Cretaceous zone; possibly a well in the McArthur
River that struck oil at that depth could qualify, but he didn't
know if it had ever been produced.
MS. DAVIS pointed out that if the first rig that comes into Cook
Inlet receives 100 percent of its cost as its credit, then you
have essentially achieved the objective of getting a jack up rig
into Cook Inlet. Under the current lease expenditure
regulations, the cost of mobilizing that rig to the State of
Alaska is fully allowed as a lease expenditure. But once that
rig is in Alaska, they also allow the deduction of the
demobilization to other parts of Alaska, but not if it leaves
Alaska. Hopefully, she said, the rig should be put to work
numerous times in Alaska.
5:05:38 PM
CO-CHAIR WIELECHOWSKI set SB 290 aside.
HB 280-NATURAL GAS: STORAGE/ TAX CREDITS
5:06:02 PM
CO-CHAIR WIELECHOWSKI announced HB 280 to be up for
consideration. [CSHB 280(FIN)am was before the committee.]
5:06:06 PM
REPRESENTATIVE MIKE HAWKER, sponsor of HB 280, said it
specifically addresses three issues regarding the needs of the
Cook Inlet: the need for gas storage for utilities and
proprietary storage for managing inventories, the need for
additional exploration, and long-term supply contracts.
He explained that the bigger components of the bill encourage
the development of gas storage facilities. It creates the first
regulatory framework for those facilities that don't exist now.
At the end of the day they will provide a volumetric-based
development credit based on certain criteria that a storage
facility has to meet. Any investment in storage in the Cook
Inlet is going to increase the gas to consumers and is a supply
chain cost. The development credit is intended specifically to
be consumer cost relief in that the credit is to be passed
through ultimately to consumers.
As far as encouraging development and further gas storage
Representative Hawker said he asked DNR to expedite permitting
of the storage facilities. It is important also to recognize
that while this bill offers the "pass through credit" for
development of gas storage facilities, for any entity to avail
themselves of those credits they must also accept RCA
regulation. This is an absolute linkage in the bill. The bill
protects the ability of individual producers to develop storage
for their own purposes for those companies who want to build
proprietary storage, but very specifically no credits are
available for it. Likewise, the RCA does not have regulatory
authority over those privately owned proprietary interest gas
storage facilities; unlike today.
5:11:17 PM
SENATOR FRENCH asked him to identify the sections that pertain
to gas storage credits and those that pertain to the RCA
matters.
5:12:11 PM
REPRESENTATIVE HAWKER responded that he wanted to present the
bill's themes first without reference to specific sections and
then he would go through a sectional. He said a couple of
significant applications for long-term contracts were not
approved by the RCA in the past several years. He asked the RCA
what it would need to approve them, because in hindsight they
would have been very good contracts to have approved. The bill
directs the RCA now when making a decision on a contract
application that they not only have to look at the specifics of
the contract, but at the consequences of saying no to that
contract. A number of sections increase access to existing tax
credits for explorers and developers working in the Cook Inlet.
REPRESENTATIVE HAWKER said this bill was developed with a great
deal of help from Larry Persily (Federal Gasline Czar), Roger
Marks (former Senior DOR Petroleum Economist), Jan Levy (former
DOL oil and gas attorney), and Julie Lucky, legislative staff.
5:15:12 PM
HB 280
Cook Inlet Recovery Act - Sectional Analysis
Prepared by Representative Mike Hawker's Office
Section 1: Sets out a short title for the legislation: Cook
Inlet Recovery Act (CIRA).
Section 2: Establishes an application process, criteria and
timeline for the Alaska Oil and Gas Conservation Commission
(AOGCC) to certify that a gas storage facility (GSF) meets the
minimum working gas storage capacity and daily delivery rate
requirements to be eligible for the financial incentives
provided in this bill.
5:17:01 PM
CO-CHAIR WIELECHOWSKI asked on page 2, line 10, if there was
"any magic" in selecting 500 mmcf and on line 13 being able to
withdraw a minimum of 10 mmcf.
REPRESENTATIVE HAWKER answered they were the product of
consensus in discussions with the DNR and DOR. Initially they
considered a bill that would pay the credit up to double the
capacity, but recognized this credit does not flow to the
developer; 100 percent of it flows through to consumers. They
were trying to second-guess the volume of large capacity storage
that will be developed in Cook Inlet, and the DOR expressed
concern that they wanted the bill as close as possible to the
perspective development as possible. It was an effort to try to
mitigate the potential gaming of the system. The idea of the
flow-through volumetrics indicates they don't want to give
credits to someone building a storage facility that cannot
deliver sufficient gas to meek their peak demands. They might
consider expanding the size of the credits once they see an
actual project.
CO-CHAIR WIELECHOWSKI asked if it's projected that Cook Inlet
would need 10 million mmcf on any cold day.
REPRESENTATIVE HAWKER answered that's the minimum amount and a
fairly low number. They get 400 mmcf/day demand on really cold
days. The idea of the storage facilities is to meet the peaking
demands, not the sustained delivery. Section 2 also says if you
cease using a storage facility within the first 10 years the
state has a recovery provision on any credits provided that
would have be refunded by the developer. The AOGCC would have to
be notified on those cessations.
REPRESENTATIVE HAWKER continued the analysis:
5:19:46 PM
Section 3: Requires a GSF owner to notify the AOGCC if the
facility ceases operation.
-Provides definitions for terms used in CIRA.
-Requires the Director of the Division of Mining, Land and Water
to give priority to and expedite "when reasonably possible" any
applications, permits and lease assignments needed for
development and operation of a GSF.
5:20:30 PM
Section 4: Directs the Department of Natural Resources (DNR) to
waive any state land lease fees or rents for the first 10 years
of a GSF's operation. The waiver would stop if the storage
facility ceases commercial operations.
-States that any waivers of lease fees or rents would be public
record.
-Requires that the GSF pass on the financial benefits of any
lease exemption to utilities that use its service.
-Clarifies that any gas withdrawn from a GSF is considered to be
non-native gas and not subject to royalty until all non-native
gas is withdrawn.
SENATOR FRENCH asked if the director has already denied permits
to producers for their storage wells.
REPRESENTATIVE HAWKER answered that he heard that DNR's policy
is that they would not permit storage facilities unless they
were an open access facility. As presented to him in his
conversations with Mr. Banks, the concern is that more storage
capacity is needed right now and smaller producers may not have
the financial wherewithal to build their own. Until they have a
very vibrant third-party storage facility, the agency had
concluded that it was best to make all future storage facilities
open access. To him, this crossed his line of a little too much
government interference and didn't recognize the reality that he
sees in the Cook Inlet where the producers have the need to
manage their own inventory (warehousing). For example, Chevron
had substantial warehousing capability in the Drift River
Terminal Facility that sat at the foot of a volcano. That
storage facility has been taken off line after volcanic
activity. While it was oil storage, it is now interfering with
their ability to maximize and sustain ongoing production because
they don't have a warehouse to put their own product in.
The same thing with gas, he said. If producers don't have a
place to store their case, the state would be encouraging them
to shut in gas and not maximize production. This bill
anticipates seeing proposals for a very large open access third-
party owned project in the Cook Inlet in the near-term, but that
would deny benefits to someone who simply wants to manage their
own inventory.
5:24:37 PM
Section 5: Directs the Regulatory Commission of Alaska (RCA),
when considering the approval of a utility's gas supply
contract, to consider the impact on consumers if the commission
rejects a utility's gas supply contract and to recognize the
value of a utility holding a diversified portfolio of gas supply
contracts with different pricing mechanisms in order to protect
consumers from inadequate gas supplies and the risk of a single
pricing mechanism.
REPRESENTATIVE HAWKER explained if an open access third-party
owned facility is constructed on state land, the lease fees or
rents would be waived for the first 10 years of that facility's
operations.
He added that this bill also provides a regulatory framework for
"last in, first out" inventory accounting in these new storage
facilities. This means the last gas pumped into it is the first
gas that comes out. This is relevant because the last gas
(residual gas to maintain some pressure in the bottom of the
well) in the bottom of the well has not ever been produced and
when it is produced there will be a liability and obligation to
pay production taxes on it.
5:27:10 PM
Section 6: Requires that a utility's cost of gas storage that is
passed on to consumers reflect the financial benefits of any tax
credits and state lease exemptions provided in this legislation.
It also stipulates that a portfolio representing diversified-
terms of gas supply contracts is a good thing.
5:28:19 PM
Section 7: Specifies that the Regulatory Commission of Alaska
(RCA) has jurisdiction over natural gas storage services
provided for gas that is owned by a regulated utility and that
any benefits provided in this legislation flows through to the
consumer.
Section 8: Further defines "natural gas storage facility" and
clarifies what is considered part of the storage facility.
-Further defines that RCA regulation of gas storage facilities
is limited to facilities operated primarily or exclusively for
third-party customers; regulation does not extend to a
proprietary storage facility operated exclusively or primarily
to hold gas owned by the storage facility owner or operator.
REPRESENTATIVE HAWKER explained that a potential loophole was
discovered by DNR and DOR that it potentially could be argued
that a large natural gas pipeline (if it were to be built),
since it is a vessel capable of storing gas, someone might argue
that it would fall under the parameters of this legislation,
which was not at all the intent. So language clarifies that a
natural gas storage facility that is part of a regulated natural
gas pipeline is not also regulated by the utility.
5:29:51 PM
Section 9: Clarifies that the names of taxpayers and the amount
of credits claimed for gas storage facilities under this
legislation shall be public information.
-Requires the Department of Revenue (DOR) to furnish the
information to the RCA.
REPRESENTATIVE HAWKER explained that this section specifies that
the RCA does have jurisdiction over gas storage services for gas
that is owned by a regulated utility. They are looking at a
couple levels of storage and in this case this gas would be
purchased on the market by a utility that has developed the gas
storage facility itself. Other provisions talk about how a
third-party facility that provides services to a public utility
is also regulated.
5:30:32 PM
SENATOR FRENCH asked if he was referring to the definition on
page 8, lines 18 and 19.
REPRESENTATIVE HAWKER answered yes.
Section 10: Establishes a credit against corporate income taxes
of $1.50 per thousand cubic feet of new gas storage capacity
opened in Alaska during 2011-2015. The credit is limited to $15
million per GSF. This section sets out minimum capacity and
deliverability requirements to qualify for the credit, including
that the GSF must be available for use by regulated utilities
and, if utilizing state land, must be in compliance with its DNR
storage lease. The credit can be refunded by the state at full
value if the owner does not have enough taxable income to fully
utilize it.
REPRESENTATIVE HAWKER explained this section picks up the third-
party customer coverage.
CO-CHAIR WIELECHOWSKI asked if the definition of "natural gas
storage facility" included the LNG plant in Nikiski.
REPRESENTATIVE HAWKER answered as they have defined the ability
for someone to get a credit under this bill, it had to be
delivering gas to consumers. An export plant and facility was
not contemplated for the benefits.
CO-CHAIR WIELECHOWSKI asked if they released some of their gas
on the really cold winter days.
REPRESENTATIVE HAWKER replied anecdotally he was aware that when
the peak demand of coldest days had occurred in Southcentral
Alaska in a past couple of winters, ConocoPhillips, who owns and
operates that facility, actually voluntarily diverted gas that
they had committed to export to customers overseas into the
supply chain for consumers. Their good-friends relationship with
their consumers in Asia allowed them to do that.
5:34:26 PM
Section 11: Sunsets the rule that limits how certain tax credits
arising from activity in Cook Inlet or from producing gas for
in-state use are used on January 1, 2011. This would allow a
Cook Inlet explorer or producer to explore or produce elsewhere
in the state and have full access to the credits it earned from
its Cook Inlet activities. This section also makes sure that the
names of producers and amounts of credit are public. It is
necessary that the information is available to the RCA.
5:35:26 PM
CO-CHAIR WIELECHOWSKI asked if this would be a good place to
stop and pick up at a future hearing.
REPRESENTATIVE HAWKER answered yes.
[HB 280 was held in committee.]
Co-Chair Wielechowski adjourned the meeting at 5:35 p.m.
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